OBG talks to Ute Menikheim, CEO for Africa, Siemens Energy

Interview: Ute Menikheim

What challenges does urbanisation pose for electricity generation, transmission and distribution? In what ways can these problems be resolved?

UTE MENIKHEIM: Reliable electricity generation, transmission and distribution form the foundation of every megacity. With economies in Africa booming, cities such as Lagos, Johannesburg and Cairo require more sustainable electricity to complement the build-up of manufacturing as well as the steadily increasing number of people flocking into these areas. Power grids designed and built decades ago struggle to keep pace with these new requirements. In South Africa alone, the grid maintenance backlog is expected to cost well over $3.4bn. The solution lies in diversifying the energy supply, by switching to renewable sources such as wind and hydro-generation, and using more efficient technologies to complement depleting fossil fuels.

To what extent should government regulators play a role in a “deregulated” utilities sector?

MENIKHEIM: There are some fundamental differences between private operators and state utilities. While government-owned operators have the advantage of financial guarantees, it can be difficult for them to maximise efficiency. Complex decision-making processes delay delivery timelines and slow projects down. By contrast, private players can optimise both efficiency and delivery, particularly in major capital projects. In liberalised markets, a regulator should ensure a level playing field between industry players. Authorities also need a sound policy framework to unbundle a market dominated by one state-owned utility.

How has the introduction of private players into the utilities sector affected tariff setting?

MENIKHEIM: Historically, utilities only built the generation, transmission and distribution capacity needed to fulfil customer demands in their service territories, whereas the price of electricity was set centrally, based on the average cost of producing and delivering power to customers. For example, South Africa’s regulatory structure evolved from the belief that the supply of electricity was a natural monopoly, and so that one supplier could provide services at the lowest cost.

Today, the relationship between customers and suppliers of electricity is poised to change. Services traditionally available only to monopolies can now be accessed by other suppliers. Through the introduction of independent power producers and the unbundling of state-owned utilities, the market is becoming more competitive. While this was meant to make electricity more affordable, unfortunately, costs today also reflect inflation, resource availability and increasing demand. This makes it difficult for operators, governments and consumers to reach a consensus on tariffs.

How feasible is it for renewables to provide a cost-effective alternative in emerging markets?

MENIKHEIM: While environmental concerns propel renewables in developed countries, African countries need to tap all the resources they are able to. This is actually an advantage for Africa, because adding renewables such as wind, solar and hydro to the energy mix will help it avoid the problems faced by many developed economies. For example, wind farms currently under construction in South Africa and Morocco will be connected to the grid long before some of the new power stations fired by fossil fuels are completed.

Furthermore, dynamic growth rates are spurring rapid advances in renewable technologies. Annual global investment in renewable energy has risen almost sixfold since 1995, with cumulative investment over this period approaching $180bn. Since 2000, global wind energy generation has more than tripled; solar cell production has risen six-fold; production of ethanol from crops has more than doubled; and biodiesel production is up nearly four-fold. Of course, the higher the demand, the lower the costs become. As a result, new technologies that harness renewables are, or will soon become, economically competitive with fossil fuels.